“Shifting your thought consumption…”

Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailouts Will Make Things Worse by Thomas E. Woods, Jr. may have one of the longest subtitles of any book around but it is a very important book. I encourage all of my readers to stop what they are doing and order this book. It is a relatively quick read that will bring you up-to-date not only on the current financial crisis but also the Austrian Economic theories behind it.

This book is the sole voice that is not following the masses in blaming the recession upon Capitalism. Instead, Thomas Woods uses many economic theories and evidence to show that the government has had more to do with this problem then we think. He starts the book with a view of how the government created the current bubble. It becomes clear that this is very much in line with the Austrian Business Cycle. He then shows the more broad picture of how this also has happened in both the Great Depression and the dotcom bubble.

The major part of the book is its eloquent attack upon the Federal Reserve system. Woods shows that the Federal Reserve has done more to hurt the economy than any other intervention. He also warns us of the impending problems that we have no had yet but could have with possible runaway inflation also know as hyperinflation. At the end of the book, Woods challenges those who believe that they are a free market conservative or libertarian that they should realize that the Federal Reserve cannot have your support. The Federal Reserve, he says, is one of the biggest interventions in the economy we have seen. They have a monopoly on money.

Everybody should pick up this book, if they want to learn about the real reason why the economy is in a downspin. People often try to blame crisises upon things they do not understand, like Capitalism. Instead, what they do not realize is that people try to control the economy and that person would have to be god in order to get it all right.

My son, Thomas (a sixth grader), has a homework assignment today: write an essay entitled “What Earth Day Means to Me.” I will help him out with my own essay.

Earth Day, to me, means an opportunity to express thanks for all the ways that capitalism makes our lives and environment cleaner and healthier.

I’m thankful for the automobile, which has cleaned our streets and highways of animal feces, which is both foul and filthy itself, and that attracts flies that spread it into our homes and workplaces.

I’m thankful for the automobile also because it allows us to travel in a cleaner environment than we had when we traveled on horseback or in buggies. Modern automobiles cool or heat the air immediately surrounding their passengers, making these passengers comfortable and, in summer, less sweaty and stinky.

I’m thankful for air-conditioning that keeps our interior environments not only comfortable but more healthy, as it allows us to better keep insects out of our homes, shops, factories, and offices — and also, in humid places, to dramatically reduce the growth of mold and mildew in our homes.

I’m thankful for indoor plumbing. (The anti-polluting properties here are too obvious to spell out. Ditto for disposable diapers — yet another product for which I’m most grateful.)

I’m thankful for the inexpensive soaps, shampoos, toothpastes, dental floss, toilet tissue, and plastic bandages and other first-aid items that make it possible for us to de-pollute our persons regularly.

I’m thankful for electronic appliances, such as those that (along with modern detergents – for which I’m also thankful) allow us to clean our used clothing and dirty dishes — clean these more deeply and more thoroughly than was possible in the past without spending multiples of the time on such tasks that we spend on these tasks today. These appliances enable us to recycle our clothing and our dishes for many reuses.

“Virginia currently has several toll systems set up, including the 14-mile Dulles Toll Road in Fairfax County, but Mr. Howell said more expansive efforts could lead to more state revenue and provide a potential replacement for the gas tax, which he referred to as a “dinosaur” funding source.

“We’re talking about leasing the concession to collect the tolls on those roads,” Mr. Howell said. “It can be a tough political argument to make, but it’s an argument worth making because it’s a sound political concept.

…

Public-private partnerships are becoming increasingly common as states grapple with a national infrastructure in need of repair: Florida is looking to lease a 78-mile toll road known as “Alligator Alley,” while Virginia itself has formed partnerships on projects like the Dulles Rail expansion and a $2 billion plan to install HOT lanes on the Capital Beltway.”

I say why stop there? Let’s privatize all of the roads. Many people complain about the quality of roads in America but nobody ever complains about the walking areas in shopping malls. When you walk from Macy’s to another store, you often do not encounter potholes or construction workers. Sure, you might say that cars put more of a wear and tear on roads than people on walkways.

But the fundamental truth is still there. The company who owns the mall has an incentive to keep problems from happening during working hours. They also have an incentive to make sure that they are always maintained. Of course, malls work differently and they do not have tolls. This is true but with today’s modern technologies it would be very easy to have speed passes that priced different times of the day. As we all know roads are a tragedy of the commons. This means that since is it free for anyone to use the road, everyone will use the road and slow traffic. If you made driver make economic decisions based upon prices in different parts of the day, you would have a more efficient outcome of traffic. I guarantee less congestion.

Following the freeing of American ship captain Richard Phillips from a band of Somali pirates Sunday, commentators have turned their attention to what can be done to control and prevent future piracy. The solutions suggested so far are what you might expect: Hit the Somali pirates at home with overwhelming force; reestablish “law and order” in Somalia so that pirates can’t flourish; and, closely-related, focus on state building in Somalia so citizens have lucrative employments other than piracy to turn to.

One suggestion that isn’t being considered, but should be, is to privatize the seas — especially those off Somalia’s coast. As the old adage (at least among economists) goes, “What nobody owns, nobody takes care of.” This is as true for oceans as it is for anything else. Piracy is just one manifestation of nobody taking care of what nobody owns when that “what” is the sea.

Governments exercise a kind of de facto ownership over the waters off their coasts; states have jurisdiction over, and thus control, what goes on in within so many miles of their shores. But there’s no government in Somalia to control what goes in Somalia’s would-be territorial waters. And in any event, pirates have taken to plying their trade 200-plus miles off the coast — watery territories nobody owns.

Predictably, the absence of ownership of these waters means no one has had much incentive to prevent activities that destroy their value — activities such as piracy. The result is a kind of oceanic “tragedy of the commons” whereby, since no one has an incentive to devote the resources required to prevent piracy, piracy flourishes. In contrast, if these waters were privately owned, the owner would have a strong incentive to maximize the waters’ value since he would profit by doing so. That would mean suppressing and preventing pirates.

Rather than trying its hand at Somali state building, the international community should try auctioning off Somali’s coastal waters. According to some Somali pirates, greedy foreign corporations are exploiting valuable resources in these waters, which is allegedly why they’ve resorted to piracy (the large ransoms earned from pirating are a happy but unexpected byproduct of pursuing social justice, I suppose). If this is right, Somalia’s coastal waters should be able to fetch a handsome price. The international community can use the proceeds of the auction for humanitarian assistance in Somalia, or put it in a trust for Somalia’s future government, if one ever emerges. The “high seas” should be similarly sold. It’s not so important where the proceeds go. The important thing is that the un-owned becomes owned.

Establishing private property rights where they don’t currently exist is the solution to about 90 percent of world’s economic problems. Piracy is no exception.

Often times when our economy goes into a recession, the media and policymakers get obsessed with spending. Here is their argument: spending causes more money to flow into businesses, which flows into employees, and employees are consumers. All along the way the money multiplies. We seem to discourage savings. Many Conservatives and others come to me and they say their reason for not supporting the government fiscal “stimulus” is because most people will save the money anyways.

What is wrong with saving? If we save our money most of the times that means we put it in the bank. The bank then takes that money and loans it out to a business owner. That business owner may then hire someone new, thus doing the same thing as consumer spending, except without the massive amounts of debt. During a recession savings increase and spending decreases and many people see this as a bad thing, but at the same time they complain about the debt each person has. This simply does not make sense.

What we truly need is a government recession! One where the government saves more and spends less. This way they too can also not run up large amounts of debt. If the government slows spending, that means they require less taxes. If they take less in taxes, then more people will have more of their own money to spend. This is not even mentioning the loss due to the collection and transfer itself.

Debt is nothing but a future tax. Since the future taxpayers cannot vote, we have decided that they are now the target for us to spread the cost to. You think we have a bad recession, wait until you see the one years from now when our children and their children have very high percentage income tax.

The government is acting like a bad teenager who cannot control his money. He goes up spends it on things he shouldn’t and charges up credit cards like there is no tomorrow. What America needs to do is to take that money away from little Barry and show him how the money should be spent (because after all it is YOUR money). We call that the Free Market!

Let’s play a game. I have a not-so-famous quotation to share with you, and then you guess who said it:

We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.

I’ll give you a hint; it was spoken by a sitting US president. Not quite enough? How about multiple-choice? Was the speaker

Current president Barack Obama

Overseer of the first-round, $700 billion bailout George W. Bush

New Deal designer Franklin Delano Roosevelt

“Hands-off” free-market supporter Herbert Hoover

Ponder that for a minute or two, and we’ll come back to the answer later on.

Geesh! Free-market, laissez-faire capitalism sure has been taking a beating in the press lately. The official story seems to be that everyone knows the financial crisis represents a failure of the capitalist system, and now only a “gigantic program of economic defense” will save us.

I suppose that would make plenty of sense, if only the details we’re being told day in and day out were actually true.

It’s rather amazing the lengths to which many of the people chronicling the economic crisis are willing to stretch the truth in order to ascribe blame to those they wish to be responsible, all the while ignoring those who actually are. One depressingly common tactic, seemingly en vogue at the moment, is to falsely claim that a person said or believed certain wrong-headed things in order to denigrate the person about whom one is making the claim. Examples abound, but the case du jour is Thom Hartmann’s traducement of laissez-faire’s “intellectual roots” in the Huffington Post:

The intellectual forefathers and mothers of the insane conservative economic policies that have brought us to where we are include Ludwig Von Mises, Friedrich Von Hayeck [sic], Milton Friedman, Alan Greenspan, Tom Freidman [sic], Robert Rubin, Larry Summers, and Ayn Rand.

Hartmann will likely get away with this slap-dash conflation of names, simply because the people he impugns are mostly dead and relatively unknown to the average reader. Hartmann isn’t alone either; it seems almost daily we read another set of distortions, myths, and outright lies trotted out by similarly minded writers.

The reality, quite unfortunately for Mr. Hartmann and friends, is that his claim is built on a wobbly foundation of misinformation. Why? (more…)

Who ever imagined that in the year 2009, the President of the United States and the protesters who sought to disrupt the G-20 Summit would actually agree on something?

“Capitalism is immoral” was one of the phrases scrawled on several of the banners carried outside the summit meetings this past week. And although he has never said this in so many words, indeed President Obama would seem to be in lock-step with that assertion, or at least with the sentiment that the assertion entails.

But whether you’re a protester or the President, to assert (or even to simply “imply,” as Mr. Obama does) that “capitalism is immoral” is to invite a slew of crucial questions. And the first and most obvious question that this raises is, “what does this assertion mean?”

Presumably, protesters – – and those who think and believe like them – – intend to convey with their “capitalism is immoral” statement that the mechanisms of the free market have failed to produce “moral” economic outcomes. Executives earn too much money, non-executives earn too little. Business owners exploit their employees, and as a result the employees can never “get ahead” and gain new ground with their personal finances.

And it’s not just protesters outside the G20 Summit who believe these things. I suspect that a great many Americans think and believe that the free market has produced “immoral” outcomes, as well. But it is not sufficient to simply say “the free market is immoral.” If one really believes this, then one must ask themselves “what system would make for a better alternative?” Yet without formally asking this question about “alternatives,” most people who believe that the free market is immoral presume, almost instinctively, that an economic system with more government controls and mandates can produce a more “moral” outcome.

So let’s assume for a moment that this is true, that more government controls and mandates on business can produce a more “moral” outcome for the economy, and for the broader society. If this is so, then one must also answer this question: who is the individual person that is so wise, so all-knowing, so just and so good, that they can make all the decisions necessary to produce this “more moral” economy?

Don’t kid yourself – – this is high-stakes stuff. If the mechanisms of the free market – – that is, private persons and organizations who, driven by their own natural interests, seek to acquire the best possible goods and services at the lowest possible prices, and who seek to sell their goods and services for the highest price they can get for them – – if the decisions and behaviors of individual private citizens don’t produce a desirable outcome, then which individual can make all the “right” decisions, and mandate all the “right” behaviors, so we can all enjoy a desirable outcome?

People of the “protester mentality” don’t often consider these more detailed, more delicate, and more difficult questions. Yet, world history is replete with kings, queens, dictators, and – – yes – – even Prime Ministers and Presidents – – who are certain in their own minds that “as long as I’m making all the decisions, then things will turn out good.”

This is precisely the certainty that President Obama displays. In the past three weeks, alone, our President used his influence to oust the C.E.O. of the General Motors Corporation, and now appears to be more-less hand-picking a new board of directors for G.M. As was noted in a Washington Times article two weeks ago, Mr. Obama’s Treasury Department appears to be creating a new position in our government – – the office of the “U.S. Executive Compensation Specialist” – – a government appointee who will determine how much money business managers and executives will be “permitted” to earn, and who will also seek to take away earnings from Americans who are believed to have been paid “too much.” It also appears that, via the Treasury Department, Mr. Obama intends to have other CEO’s removed and replaced as well.

So is this the pathway to a “more moral” U.S. economy? Nobody questions that there have been serious failures among many American corporations. But does this one man, Barack Obama, know the banking, and insurance, and automotive, and healthcare, and energy businesses so well that he, alone, can determine what are “fair” wages, and prices, and practices in all situations.

Such an assumption of the U.S. President defies the limitations of the executive office as set forth in the U.S. Constitution. But constitutional limits don’t seem to matter to our current President.

So now it is left to the American citizenry and the U.S. Congress to determine if this one man, Barack Obama , is so wise, so all-knowing, so just and so good, that he can make all the decisions necessary to produce this “more moral” economy. How will the American people respond to this all-important question?

“Robots are stealing American jobs. In a 76,000-square-foot zone of the 832,000-square-foot Zappos warehouse in Shepherdsville, Kentucky, 72 robotic “drive units” organize and deliver shelves of goods—from argyle socks to handbags. People remain in charge (for now), because it takes human dexterity to pack items into a box for shipping. But the bots still have plenty to do, picking up the slack on boring tasks like shifting inventory.

The droids roll at 3 miles an hour, navigating via barcodes stuck to the floor and commands from a central server. And they’re buff, able to lift half a ton.”

” A vending machine that bakes fresh pizza in minutes for a few euros has got Italian chefs in a whirl before it hits the streets in the coming weeks.

The bright-red “Let’s Pizza” machine uses infra-red rays and technology developed at the University of Bologna to knead flour and water into dough, spread it with tomato sauce and a choice of topping, and cook it — all in less than three minutes.”

We better get Obama on this! How could we ever keep inefficient human in place of these robots that do not even work for wages. And you thought outsourcing to lower wages was bad. Okay, enough joking around. It is time to wake up, people. Businesses using low cost robots to replace humans is a good thing in the long run. In the short-term there will be problems because of employees having to retrain. This is the natural progression of society. We become more and more efficient. If you do not believe me, get off your computer because it destroys jobs. Then go get a feathered pen made by hand, some parchment also made by hand and write me a letter. That way the jobs lost to computers and emails will not suffer.

Technology has made us wealthy and to be against outsourcing is to be against technology.

In a market economy, business deaths are like death itself – an unfortunate but inevitable fact of life. However, recent government bailouts have tried to stop the inevitable by intervening in the market, at least temporarily saving failed firms from the economic grim reaper. Before putting the next failed business on life support, it’s worth remembering why it makes sense to let struggling producers expire.

• When failing businesses are allowed to fail, resources are released from employments where they don’t add value and made available for employments where they do.

Resources used for one purpose can’t be used for another. Thus, it’s important that they find their way to the purposes we value most. Enter the profit-and-loss system. Under this system, when producers use resources in ways that are consistent with our wants, they earn profits. When they don’t, they earn losses. If losses are severe enough or accumulate over time, the producers who earn them go under.

Far from cause for concern, this failure is cause for celebration. When ineffective producers fail, resources committed to producing goods we value less are freed for producing goods we value more. Polaroid’s failure released resources for the production of digital cameras; Commodore Computers’ failure released resources for the production of IBM computers; and Chi Chi’s restaurant’s failure released resources for, well, the production of food that tastes good. Who better to sacrifice the resources required to expand production of the things we want than producers of the things we don’t?

If government prevents failing producers from going out of business, resources get “stuck” in employments where they’re less productive. We can’t have as many of the products we care more about because the means needed to make them remain locked in the manufacture of products we care less about. Society suffers as a result.

• When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth.

We take it for granted that producers know what we want. But this information doesn’t appear magically. It has to be produced. The profit-and-loss system produces this information – but only when government lets failing businesses fail.

Profits and losses do for producers what traffic signals do for drivers. They tell them when to “go,” “slow down” and “stop” their productive activities. By communicating which resource combinations consumers value most and which they don’t, profits and losses direct “economic traffic,” informing producers how to produce.

If government prevents ineffective producers from failing, the red light on the “economic traffic signal” stops working. Production continues and resources flow when they should halt, destroying wealth instead of creating it.

• When failing businesses are allowed to fail, producers have incentives to combine resources in ways that create wealth.

The profit-and-loss system works because successful producers reap rewards when they combine resources effectively and unsuccessful producers incur costs when they don’t. The prospect of profits from making good decisions and losses from making bad ones encourages producers to make choices that improve our lives.

But if government shields ineffective producers from the consequences of their bad decisions, producers’ incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they’re no longer responsible to consumers when they make poor choices, the link connecting producers’ and consumers’ interests is weakened and, with it, the economy’s ability to advance.

At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.

Peter T. Leeson is BB&T Professor for the Study of Capitalism at George Mason University and author of the new book, “The Invisible Hook: The Hidden Economics of Pirates.”.

On August 2, 1927, President Calvin Coolidge had breakfast in the White House residence with his wife, Grace, and remarked to her “I have been president four years today.” It was one of those quick, concise, directly-to-the-point sentences she had been used to hearing since they met in 1905. It was also something the American people were familiar with, having nicknamed the 30th president “Silent Cal.”

He had a 9:00 meeting with reporters in his office that morning. Before fielding a few questions, he told those gathered: “If the conference will return at 12:00, I may have a further statement to make.” Curious, but compliant, in those long-since-gone days of semi-civility between presidents and the press, the journalists found their way back at noon.

An hour or so before that conference encore, Coolidge took a pencil and wrote a message on a piece of paper. He handed it to his secretary with the instruction to take it to his stenographer and have him make several copies – enough for the newsmen who would be at the 12:00 meeting. Ever the frugal man, he suggested that the brief statement could be copied several times on the same sheet, thus only using a few sheets of paper. He told the secretary not to give the note to the stenographer, though, until about 11:50 a.m.

He really wanted to manage this story.

He asked for the pages to be brought to him uncut and before the reporters were admitted to the office, he took a pair of scissors and cut the paper into smaller slips. When he was just about ready, he told his secretary:

“I am going to hand these out myself; I am going to give them to the newspapermen, without comment, from this side of the desk. I want you to stand at the door and not permit anyone to leave until each of them has a slip, so that they may have an even chance.”

An “even chance” at a big scoop, that is.

The handwritten note from the president said: “I do not choose to run for president in nineteen twenty-eight.” Though the now classic Broadway play (made into several film versions), The Front Page, was yet a year away from being published and produced, it comes to mind with the image of dozens of reporters rushing to find telephones.

Calvin Coolidge could have been re-elected if he had wanted the job for another term. His anointed successor, Herbert Hoover, won big in 1928, though it is clear that Coolidge was less-than-enthusiastic about the “Great Engineer.” It is one of those curious “what ifs” of history – would Coolidge have dealt with the coming of the Great Depression better than his successor?

Historians tend to bunch the three Republican presidents of the 1920s – Harding, Coolidge, and Hoover – together in a way suggesting they were identical triplets separated at birth. But there were many differences – some subtle, some not so much.

Herbert Hoover, all of his speechifying about “individualism” notwithstanding, was not the fiscal conservative many today make him out to be. As Amity Shlaes has pointed out in her often-quoted-these-days book, The Forgotten Man: A New History of the Great Depression, Mr. Hoover had a strong interventionist streak in his personality. He “could not control his own sense of agency,” and “liked to jump in, and find some moral justification for doing so later.” So, in many ways, he helped to turn a recession into the Great Depression “by intervening in business, by signing into law a destructive tariff, and by assailing the stock market.”

Ironically, when closely examined, Herbert Hoover’s approach to economics had more in common with his successor than it did with the two men preceding him in the White House.

Warren G. Harding generally ranks in the bottom five when studies are done about the effectiveness of our chief executives. In fact, Hoover fares better than the man from Marion, Ohio. This is largely due to the scandals that came to light after his untimely death in San Francisco in 1923 – the affair known as Teapot Dome. Also, some of Mr. Harding’s personal behavior was less-than-presidential. That said, he might have been a saint on that front compared to president’s 35 and 42.

What is usually missed about Harding, though, is how effective he was on the issue of the economy. When he assumed the presidency in March of 1921, he inherited a mess. Woodrow Wilson had expanded the role and size of government dramatically, incurred a $25 billion dollar debt, and cracked down on political opponents – even imprisoning some (socialist activist Eugene V. Debs, etc.).

In fact, the economic problems in the 1920-1921 depression were actually worse in many ways than the Great Depression a decade later. But that downturn didn’t last as long – thankfully. Warren Harding cut federal spending and lowered taxes. And in less than two years the number of unemployed in the country fell from 4.9 million to 2.8 million, en route to a rate of 1.8 per cent by 1926 under his successor, Mr. Coolidge.

Oh – and Harding set the political prisoners free, even inviting Debs to the White House. He was a classier act than many now remember.

By the time Calvin Coolidge became president upon the death of Harding in August of 1923, the country was on its way to enjoying some great years of prosperity. He was a fiscal conservative who tried his best to stay out of the way. He knew that the government functioned best as a referee – not as a participant in the economic game – or as a team owner.

After he was elected in his own right, he told the nation in his March 4, 1925 inaugural address:

“I want the people of America to be able to work less for the government and more for themselves. I want them to have the rewards of their own industry. That is the chief meaning of freedom. Until we can re-establish a condition under which the earnings of the people can be kept by the people, we are bound to suffer a very distinct curtailment of our liberty.”

His decision not to run in 1928 – at the height of his popularity – puzzled many. But Coolidge understood the nature of leadership, and its seductions. He explained it this way:

“It is difficult for men in high office to avoid the malady of self-delusion. They are always surrounded by worshipers. They are constantly, and for the most part sincerely, assured of their greatness. They live in an artificial atmosphere of adulation and exaltation, which sooner or later impairs their judgment. They are in grave danger of becoming careless or arrogant.”

Of course, it can never been proven, but I suspect that if Calvin Coolidge had decided to run again in 1928, he might have responded to the initial shock waves of 1929-1930 differently than Hoover. Maybe, just maybe, the Great Depression would not have lasted so long. And maybe, just maybe, people who should know better these days would stop trying the same old failed “interventionist” tactics that never really worked backed then.

At any rate, Mr. Coolidge died suddenly on January 5, 1933, after Hoover had been badly beaten by Franklin Roosevelt. He did not live to see what a prolonged depression looked like, but one suspects that he would have ventured an opinion or two.